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The government's claim that this was unavoidable because of the losses being suffered by the oil marketing companies (OMCs) is difficult to swallow. When the domestic prices of oil products are controlled but the price of imported oil is rising, oil marketing companies receive from the consumer less than what it costs them to acquire the products they distribute. This leads to what are termed under-recoveries. However, in most years these under-recoveries do not turn oil refiningand marketing firms into loss-making enterprises. This is because they deliver

a range of products and services, the prices of all of which are not controlled.Under-recoveries are notional losses that only lower book profits relative to some benchmark. Thus, there is little danger that the industry would be bankrupted even if prices were kept at their earlier levels. Moreover, because until recently the industry was wholly in the public sector, the prices of oil products were treated as one set of instruments in the tax-cum-subsidy regime of the government. Any losses suffered by the industry or additional funds it required for investment could be met from resources mobilised through taxes that fall on the rich. There is, of course, the question of fairness. Since there are many playersinvolved in the industry, there is no reason why under-recoveries should affectonly the books of the oil marketing companies. This requires the oil refineriesto offer discounts when selling products to the OMCs and for the government to r

educe the taxes it levies on oil products in order to absorb part of the under-recovery. The government should have focussed on these matters for which rules can and have been devised. Opting instead for a steep hike in petroleum product prices in the midst of an inflationary episode is clearly mistimed, insensitive, and politically self-damaging. It also seems intended to favour the private companies that have been allowed to enter and expand in this sector. Private companies will treat any shortfall in profits as a loss and demand price adjustments. Butthey cannot be placated by unduly burdening the rest of society, especially thehundreds of millions of poor people.

HT

Oil prices in India remained administered for eight years after they were ostensibly freed. Only now the government has mustered the courage to free petrol frombureaucratic pricing. The arguments for subsidy and damping international crudeprice fluctuations bear little iteration. But the way we go about it, however,has left a lot to be desired. India changes its fuel prices with an eye more onthe election calendar than on the Brent graph, losing much of the damping desired and stretching in the process both the buyer and seller of oil. With the price

of petrol pumped out at the refinery as well as at the gas station following international crude oil prices, the consumer will be subjected to the harsher discipline of market forces that curbs wasteful expenditure. It remains to be seen how efficient the mechanism we devise to transmit global oil movements to the Indian market is; the hard part will be for the government to resist the temptationto decide when and by how much fuel prices should move.

Petrol is, of course, the easy bit. It accounts for only one in ten rupees Indian oil companies and the government lose on account of selling fuel below its market price. Diesel, kerosene and cooking gas make up for the other nine. In the 12 months to March 2010, the government picked up a tab of Rs 71,300 crore of theRs 103,300 crore under-recoveries of the oil companies. Fridays hikes in the prices of diesel and the cooking fuels will shave Rs 24,000 crore off the Rs 77,000

crore estimated losses this year, but they fall short of the government-appointed Kirit Parikh Committee recommendations for deeper reform. Freeing up diesel prices alone would have wiped out another Rs 25,700 crore. Steeper hikes in the p

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rices of cooking fuels would have limited the governments oil subsidy to

Rs 23,000 crore for any price of crude oil between $70 and $140 a barrel. Presumably, some sort of subsidy sharing will be in place till the next logical step of free diesel prices is reached. Its contours will keep shaping the fiscal deficit.

Free fuel prices are a precondition to reducing the tax burden petroleum carriesin India. Although the government does not put out numbers, conservative estimates suggest half the excise duty collection in the country is from petroleum products. Even with the subsidy in place, petrol cost thrice as much at an Indian gas station as it did in the US. As domestic petrol prices rise another 10 per cent, this gap opens up. Part of the reason for Indias relative lack of competitiveness among Asian manufacturing exporters is its expensive energy: the latest round of hikes could add up to a percentage point to wholesale inflation. Dismantling its high-cost energy economy has been a crusade India has shied away for toolong. Rejoice in the baby steps we have taken last week.